IRAQ CBI GOVERNOR ON POST-SBA RELATIONS, CASH

C O N F I D E N T I A L SECTION 01 OF 03 BAGHDAD 002990 SIPDIS E.O. 12958: DECL: 09/15/2018 TAGS: PREL EFIN EAID IZ SUBJECT: IRAQ CBI GOVERNOR ON POST-SBA RELATIONS, CASH CRUNCH, AND HIS PROPERTY WOES REF: A. BAGHDAD 2431 ¶B. BAGHDAD CLASSIFIED OI SEPTEMBER 15 ¶C. BAGHDAD 2854 Classified By: EMIN - Marc Wall, Reasons e.o. 12958 1.5 (B,D) ¶1. (C) SUMMARY: In a meeting with EMIN and Treasury Attache September 14, Central Bank Governor Sinan Shabibi offered a tour d'horizon of issues concerning the CBI. Shabibi looked forward to the final tranche of Paris Club debt write off. He was open to a follow on "precautionary" Standby Agreement with the IMF in order to continue IMF technical advice after the March 2009 termination of the current SBA. Shabibi said the CBI remains committed to fighting inflation despite the lack of understanding in the GOI of the of CBI's role. He hopes to see inflation in the range of nine to ten percent, at which time he anticipates adjusting the tools he uses. He did not believe that the CBI policy rate was the most effective such tool in an economy where credit is so limited. ¶2. SUMMARY CONTINUED: Saying "I will not be flexible on this," Shabibi underscored his insistence that the GOI provide the CBI with an appropriate parcel of land on which to construct a CBI complex. He was confident that the next delivery of Iraqi dinar will arrive September 15, with regular deliveries to follow. He noted that the cash shortage arose primarily because of the GOI decision suddenly to increase GOI employees' salaries, which overwhelmed the contingency cash reserve that CBI had planned at the beginning of the year. END SUMMARY. ¶3. (C) In an introductory meeting with EMIN on September 13, Central Bank of Iraq Governor Sinan Shabibi, accompanied by his Deputy Ahmad Al-Jaboory, told EMIN and Treasury Attache that he looked forward to the final tranche of Paris Club debt relief at the and of the current Standby Arrangement (SBA) and said he "looks forward to continuing our relationship with the IMF." He noted that the Iraq-IMF relationship will change and should focus more on technical assistance in areas like reserves management. He indicated that he had had good meetings with the Financial Services Volunteer Corps (FSVC),and looked forward to working with them. At the same time, he was looking at training and strategic advice from the IMF, and would want to ensure that the two programs are not duplicative. -------------- --- Central Banking Largely Misunderstood by the GOI -------------- --- ¶4. (C) Asked whether he was experiencing political pressure on IMF SBA conditions such as inflation control and its attendant high CBI policy rate, Shabibi admitted that the GOI needed to coordinate better internally on its approach to inflation fighting. Al-Jaboory noted that the IMF focus is on economic stability which is something that is far less visible to the average Iraqi than the salary increases and capital projects the rest of the GOI is focusing on. Shabibi, elaborating on this theme, said that the relatively high policy rate of 16 percent must be put into context. He noted that money is flooding into the Iraqi economy, primarily from the oil windfalls but also from international donors and investors. As for those who complain that the high policy rate is choking off credit, Shabibi said Iraqis -- both in government and in the private sector -- don't understand the true cost of money after so many years of GOI-subsidized lending. Eventually, he said, Iraq will be in a situation where market rates will prevail, but it will take time. (Note: See REF A for more on political pressures against the CBI. End note.) ¶5. (C) Noting the success the CBI had had in curbing inflation since the inflation spike in 2006, Shabibi said that sometimes GOI ministers seem to want to take credit for this themselves. He said most of his colleagues, while they are good people, really don't understand, much less appreciate, the role of an independent central bank in a modern economy. One example from current circumstances is the GOI focus on spending its oil windfalls. Ministers, he said, focus only on how much money they spend without differentiating between operating and capital expenditures, and they don't understand that the former is inflationary while the latter can be neutral. He is encouraging the GOI to analyze how it is spending its windfall and not just focus on how much it is spending. He wants the GOI to engage in a dialogue on the equilibrium between these two effects. This sort of thing, he said, is a new experience in Iraq for the central bank, which historically has simply executed the policies of the government. ¶6. (C) Asked how concerned the CBI is at inflationary pressures, Shabibi replied that he is trying to bring core BAGHDAD 00002990 002 OF 003 inflation down from the current fourteen percent to something on the order of nine or ten percent. He anticipated that his inflation fighting tools will change, with less of an emphasis on the policy rate, which he wasn't sure had such an important effect on inflation in Iraq, since borrowing was so limited. He plans to develop a "policy package." Currency appreciation would continue. -------------- -------------- CBI: Still Hasn't Found the Home it is Looking For -------------- -------------- ¶7. (C) As to other concerns, Shabibi vigorously argued that the single most important issue to him was the lack of progress in securing a facility to build a new CBI complex. Starting with an observation of how nice the Fed facility was that he had just visited in Jackson Hole, Wyoming, Shabibi said the Iraq CBI needs something comparable. He complained that he wasn't getting any support from working levels in GOI. Despite the good promises of his "friends" PM Maliki and Finance Minister Jabr, building after building had been offered and then withdrawn. Shabibi said he was frustrated that eight months after the fire that destroyed the old CBI headquarters there has been "no progress" in developing a new one. This was especially frustrating since the CBI bought nearly 80 acres for a new facility in 2004, but the transfer has been in limbo due to the Iraqi intelligence service's refusal to relinquish the property. Shabibi went over the long story of the different properties that had been offered, culminating in the latest offer from Finance Minister Jabr of 20 donum (note: about 50 acres),which had subsequently been whittled down to six donum as ministry officials found other uses for parts of the property. Complaining that four donum had been taken for a hotel, Shabibi said -- "(MinFin) think a hotel is more important than a central bank?!?" ¶8. (C) Shabibi said he "will not be flexible on this." Al-Jaboory reinforced Shabibi's personal frustrations at how CBI was being mistreated by the GOI, and said the CBI was prepared to go so far as to sue the Finance ministry for not returning its funds from the 2004 purchase and would complain about lack of support from the GOI at the Bank/Fund meetings in October. (Note: see ref B for more on Al-Jaboory's views. End Note.) Shabibi complained bitterly that Finance Ministry officials have not made good on Minister Jabr's promise, and that they simply do not understand the role and importance of a central bank, thinking it is "just another bank." His bottom line: CBI needs 10 donum of land, and soon, since the facilities they need to build will include separate structures for cash handling, IT, training, executive and meeting suites and storage vaults, which will take at least three or four years to complete. -------------- More Cash is on the Way -------------- ¶9. (C) Referring to the cash crunch the GOI has experienced since late summer (REF C),Shabibi assured us that with a delivery of 500 billion dinar on September 15, the payrolls for August and September will be met. Moreover, Shabibi said he is planning more or less "continuous" deliveries over the course of the five year contract. He explained that one reason there had been the August crunch was the Finance Ministry's decision to use some of the oil windfall to nearly double civil servants' pay in one payment. This was a sudden decision, he said, which exhausted the contingency reserve that CBI had planned at the beginning of the year. Treasury Attache warned Shabibi to expect another spike in salary payments in January 2009, when the GOI, after urging from the IMF to delay its supplemental salary payments to avoid an inflationary spike, will pay a second installment. Shabibi interjected that one more reason for a full CBI complex as that at some point in the future Iraq should be printing its own banknotes. ¶10. (C) COMMENT: By insisting on his 10 donum bottom line for the CBI complex, Shabibi clearly is drawing a line in the sand. He believes that the GOI's mistreatment of the CBI on the property is a cipher for a broader range of misunderstanding within the GOI on the proper role of a central bank in a modern economy. Moreover, it was clear that at one level he feels personally disrespected: he visibly stiffened when Treasury officer related a Finance Ministry DG's comment that CBI "...won't get the 10 donum it is asking for. If they insist on that we'll give it to someone else." Shabibi responded "then let them give it to someone else!" He is looking for more support from the USG in this quest; wrapping up the conversation he said the building issue is "really paramount," and dropped a broad hint that "everyone says the CBI is doing a great job..." implying that if we support his policy work we should also BAGHDAD 00002990 003 OF 003 support his efforts to ensure the CBI can function efficiently and independently in a proper facility. Embassy will seek additional avenues to support Shabibi's efforts to acquire a proper site for a new CBI complex. CROCKER